Weekend reflections

Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.

The new Commonwealth plan seems to be based on two main ways of reducing water consumption in rural areas where problems have occured because of the over allocation of water and because water is too cheap. The first way proposed is to reduce the total allocations by buying out some of the existing water allocations.

Another way proposed is to work with farmers to reduce wastage of water. Here funds will be given to improve pipes, fix leaky drainage, presumably install drips instead of flooding and other ways of making better use of water. In effect this increases the supply of usable water and can be thought of creating “new” water. The Commonwealth will fund these savings and will get half the savings while the farmer will get the other half to use for other purposes.

Both these approaches are unlikely to be the most efficient use of the funds to reduce consumption. They will probably work but be expensive.

1. Funds given to farmers to buy water allocations is a handout and these funds will not be used to create “new” water through investing in water technologies because the money will get a better return elsewhere.
2. Allocation holders will try for as much money as possible to be spent on their property because that is their best strategy. There is no incentive to use the money on other properties or on multi property savings.

The underlying problem with the system is that the price of “new” water is a lot less than the price of “old” water.

There is another approach which is likely to give a better return in terms of water saved and may allow the price of “old” water to rise to be closer to “new” water.

Let water allocations become tradeable throughout the whole country with the proviso that the money obtained from the sale of water allocations has to be spent on ways to increase the supply of water. Let us call this money WaterFunds. WaterFunds can be sold but their value is the value to the person who can use them to save water and hence is the value of the “new” water available through using WaterFunds.

Governments are heavily involved in the system because they must control and set the total allocations available in any one year, they must police the use of water, and they must determine how many Water Allocations they will purchase for environmental flows.

This approach requires agreements by the states on defining current Water Allocations and agreeing to Water Allocations being able to cross state boundaries. Agreements need to be reached on Ground Water Allocations and methods of policing Ground Water and on farm use of water. Each year the total water allocations available has to be set by governments. Governments are also required to police the expenditure of WaterFunds on appropriate projects. (These agreements are required no matter what system is used).

The price of all water could increase if allocation holders were reluctant to sell.
Increased revenue from the higher price of water could be used to fund the governance of water and any excess could be spent through WaterFunds for the creation of “new” water or could be used for the purchase of Water Allocations to be used for environmental flows.

As the value of “old” water increases it will encourage Allocation holders to sell their Water Allocations. Governments now have a method of controlling the usage of water through adjusting the price of old water and then letting the market in investment funds for water savings take care of spending the money efficiently.

The approach will encourage the efficient use of WaterFunds because people who hold them will look for the best return no matter where the project exists. The approach will get a return on all funds spent by the government and may gradually bring the cost of all water to the cost of “new” water.

It should cost a whole lot less than the proposed system because all the money spent on buying Water Allocations has to be spent on gaining “new” water.

The Independent (25/1/07) now reports overt threats by the Israeli Govt. against Iran: ‘… The Israeli Prime Minister, Ehud Olmert, dramatically raised the stakes in the international showdown with Iran last night, with a clear warning that his country was prepared to use military force to prevent Tehran from obtaining a nuclear weapon.

‘”The Jewish people, with the scars of the Holocaust fresh on its body, cannot afford to allow itself to face threats of annihilation once again,” Mr Olmert said in a speech to a high-level security conference in Herzliya. “No nation has the right even to consider its position. It is the obligation of every country to act against this will all its might.” “We can stand up against nuclear threats and even prevent them,” he said.

‘Israeli military officials warned this week that Israel â€“ acting alone or in coordination with the US â€“ could launch preemptive military strikes against Iran before the end of this year’…

The more they talk the less likely it will happen in my interpretation. To my mind this sort of hard talk is not a warning to Israel but rather negotiation with the US political establishment.

There are alot of moves in Washington trying to put in place legislation stopping Bush from attacking Iran without explicit congressional approval. They are worried that Bush might do something stupid with the with the very broad powers he was given in the authorisation for the Iraq war (only Congress can declare war. The president can’t by himself). They are trying to rescind his blank cheque.

Israel can see that its war on Iran is slipping away and is trying to prevent that. I think they have come to the conclusion its militarily beyond them on their own, so they will have to get Washington to do it. If it wasn’t they would keep their mouths shut and just do it.

The Israelis are well aware that the Iranians can do serious damage the the US forces in the Gulf (really serious, tens-of-thousands-of-casualties serious). Their ability to hurt Israel itself is limited to proxies like Hezbollah (not strictly a proxy, but pretty close). So, the thing to do is provoke the Iranians into launching at some US asset, leaving the US no choice but to apply massive force against Iran, even nuclear. The scenario leaves millions of Iranians dead, quite a lot of Americans, Iraq in an even bigger shambles, possibly a Shia uprising in northern Saudi Arabia, and severe worldwide economic turmoil. The question is, is it possible for Israel to pull it off? I dunno. I think they’ll screw it up.

The even bigger question for the Israeli military is how the hell they think they can maintain military superiority over their neighbours for the next, say 100 years. They can’t. It’s inevitable that someone will one day acquire nukes and the ability to use them. Sure, doing so will ensure self-destruction, but what does Israel do? By, say, 2028 there should be so few Palstinians left with a direct connection to 1948 that the Israelis can probably avoid “right of return” negotiations, but they will have to negotiate, properly, at last.

We can actually solve Australia’s water problems without spending much (Government) money at all. First, fully specify water property rights (this may require some Government money to buy back overallocated licences).

Then implement full water trading, including between urban and rural areas and across state boundaries, getting rid of exit fees. Ditch all urban water restrictions, allow urban areas to by water from rural areas at (much lower) cost. Allow anyone to sell water to the urban area at the urban water price (as long as they meet quality standards!).

The Government should buy additional licences for water flows that are needed for the environment.

Why is this good? Simply, it allows gains from trade. Both the buyer and the seller benefit from trade. For example, current owners of water licences will get a capital gain if they sell the licences on market.

For urban areas where there is inadequate ability to move water from rural areas, urban prices may remain very high, until the price difference encourages the market to build water channels/pipes from rural areas that have much lower prices.

If that still doesnâ€™t generate low enough prices in urban areas, then the high prices in urban areas will encourage efficiency gains, recycling, or even desalination (NB need to ensure the greenhouse costs of desal are incorporated in its costs).

Result is probably lower prices in urban areas and higher prices in rural areas. Perhaps less cotton and rice is grown â€“ but the water is being allocated to its highest value use, whether it is growing my grass or washing my car or growing cotton.

With this framework in mind, Iâ€™m not at all happy with the Governmentâ€™s proposals, as they throw money at a problem which could be solved without much expense. Even worse, perhaps this plan makes the ideal solution even harder to reach.

Iâ€™m also not so keen on the WaterFunds idea proposed by Kevin Cox. If I understand correctly, if I sell my water allocation, I have to use this money to increase the supply of water. An obvious problem â€“ what if I sell all of my water allocation? I then donâ€™t have any way to increase the supply of water, unless I just buy another water allocation (or spend the funds on cloud seeding??).

More generally, I donâ€™t support restrictions on what I do with money I earn by selling an asset. We donâ€™t force people selling a house to spend the money on another house.

On the other hand, perhaps I donâ€™t understand the WaterFunds proposal.

A few years ago there was a lot of talk about customer service. The talk was about the failure of traditional methods of customer service and a new need to focus on providing customer service. This occurred in both private and public sectors.

This was at the time that call centres started and those who had provided customer service were sacked. The reason we began to talk about it was because those who had decided on a cost cutting strategy needed to convince the public that we could have both customer service and savings. Those of us who have spent hours of our lives on hold on the phone know that our call really isn’t terribly important – but we are unable to talk to a real person except by punching number after number on our phones.

The debate on Aussie values by our Prime Minister is eerily like the discussion on customer service. The only reason we need to discuss them is because we need to be diverted from examining what is going on. Multiculturalism, which is little more than giving respect to others who are different to ourselves, is out the window, with the name of DIMA (Dept of Immigration and Multicultural Affairs) suddenly changed to DIC ( Dept of Immigration and Citizenship) just days before Australia Day.

Many of those who became citizens on Australia Day did not do so out of a sudden discovery of Aussie values but the fear that although they have been living here many years that if something went wrong they would be deported without thought. Those expressing this view were not the pariahs of the year but those who had migrated after World War 2 or shortly afterwards – honest and praiseworthy people. Many feared that their English would not pass the test after July 1. They value their lives but are prompted by a value which has overtones of bullying.

The trouble with the values debate is that the values which I hold dear of honesty, fair treatment, egalitarianism and love of family are becoming subsumed by a focus on nationalism, my country right or wrong and a culture which enforces conformity because it can.

We have also been asked to learn more about our history but the study of history has become increasingly devalued in education because it is not a transferable job skill. So we only begin to talk about history when the study of history is perverse in the manner of Keith Windschuttle. No doubt history a la Howard will be part of the national curriculum with no place for a local narrative.

What else is in danger – the environment is in dangerous territory. Now that the Fed govt has begun to talk about it I am really worried. Is it possible to outsource it to India as we did with Customer Service?

There is no national solution whilst the possible solutions are held in the political sphere. What difference for SA if instead of NSW and Vic state govts being the drivers that NSW and Vic politicians are? SA Can we outsource the water rights to corporations so that the Federal Govt can just take it over as it did with Industrial Relations.

The more we talked about Work Choices the less we have had – the pattern is well established. I hope that the value which comes to the fore is local solutions for national problems and that we look after our mates even if they do live in a different state or have a different cultural background. The only way I can see it happening is to change the leadership so that cronies aren’t the only mates who count.

At the height of the Crusades,the Christian armies established the Latin Kingdom of Jerusalem
It lasted just under 200 years before the Arabs under the leadership of the greatest Arab leader ,Saladin, occupied the Kingdom,thus ending the existence of the European enclave.
Is that a sort of preview of Israel’s ultimate end.?Peter Evens raised the whole question of Israel’s survival 100 years from now.Who knows ??
The history of the event is largely unknown in the West,but very much remembered in the Arab World even today !

The main objection to the Water Funds approach seems to be MPs point that you are restricted in what you can do with your money when you sell an asset. This is correct but you can sell your Water Funds for whatever you can get them which will be considerably less than their face value and if you wish you can invest other money in Water savings schemes.

As MP rightly points out the problem would be solved if we could make a free market in water. Unfortunately this is difficult because the market is distorted for a variety of reasons that are not easily solved. The Water Funds idea is to ensure that the taxpayer funds spent on infrastructure will be spent efficiently. Although I would agree with the idea of a free market as theoretically the best solution it is politically “impossible” to make a free market because it would radically change many things in our society that at this time are unacceptable. Water Funds will create a new market for infrastructure funds and will ensure that money is spent efficiently which is after all the point of markets.

There are problems with the physical nature of water that make it a difficult market. Water is essentially free to supply if it falls on your property as rain or runs past your property in a stream or runs underground through your property. Because of this the other ways of increasing supply like recycling or better use are orders of magnitude more expensive. Because of this you have the upstream downstream issues and the issue of policing the use of water that falls on property and the issue of policing the use of water that runs under the land.

The current urban and rural market prices of water are two orders of magnitude in difference. Is it “fair” that the water rights of a property owner whose water can be used for urban purposes is 100 times more than the water rights of someone over the next valley?

Water is not like electricity and it is expensive to move between catchments and this means that there are 100’s or markets in Australia and money for infrastructure projects will tend to be in the expensive areas whereas in terms of the country it may be more efficient to spend it in a different catchment.

In urban areas we have the social issue of a rich person being able to water their lawn while next door the person cannot afford to bath. There is a deep held belief that this is wrong and it would be political suicide for a government to introduce a regime that allowed this.

You then have the problem of the allocation of water rights. Is it fair that water rights have been allocated as they have been. Perhaps they really belong to the indigenous people?

Water is more than a little over allocated. By some measures it is several times over allocated. Ground water is currently not allocated and determining how much is available and which parts of the country an aquifer supplies is a difficult expensive task.

For all these reasons and more water is a “hard” market and a simplistic approach of saying let the price find its own level is not going to happen.

The idea of Water Funds is to solve the problem of spending money on infrastructure efficiently through a market mechanism. That is remove water from the equation and create a currency that can only be used to build infrastructure to make better use of the water we have. In other words to try to separate out the water that falls from the water we reuse or better use. Using Water Funds will mean that money for water infrastructure will go to the part of country where it will get the most value. There is no reason why Water Funds from urban areas could not be spent in rural areas if that is where the most value will be obtained.

Water Funds are derived from water and in the long term the money will come from the sale of “free” water but they are separated from the 100’s of catchment water markets we have in Australia.

We seem to have little problem with the idea of creating special currencies for special purposes (like the Australian dollar) or frequent flyer points for airline travel. The argument that the money obtained from an “artificial” asset like water allocations should not have restrictions is not strong. Other than that argument I have yet to hear why Water Funds will not “solve” the problem of efficient allocation of infrastructure funds.

The only other argument I have heard against the idea is that it would be too hard to administer. I have come from that side of the problem and we have designed a system that can administer it efficiently (less than 1/2% of the total value).

KC – I totally agree that a fully free market in water is politically impossible at the moment. So we have to work towards the ideal solution – perhaps the Water Funds idea moves us in the correct direction, but I can’t be sure about that.

However, I’m fairly confident that we will eventually be able to get to the ideal – it may take decades, however it can be reached – but only if we start now. As an analogy, in the 1960s-70s it would have looked impossible for Australia to have free trade, but now it looks eminently possible, because we started moving in the right direction in the 1980s.

My main concern with the GOvernment’s plan is it doesn’t appear to be moving us in the right direction – tho again I can’t be sure about that. To say one thing positive, having the Commonwealth control the Murray-Darling will mean interstate trade will be much easier. But overall the benefits are not clear.

MP once you have accepted the idea that a solution to situations where there is a market failure – for whatever reason – is to create a new currency that allows “the market” to work its wonders in allocating resources then there are many practical opportunities for greater efficiencies in all sorts of areas. It it may prove to be a more efficient way to handle the distribution of many expenditures than using a single currency.

For rural water my preferred “solution” is to create something called “Water Rewards”. Water Rewards are earned by people who have water allocations but who do not use all their allocation. The only restriction is that earned Water Rewards can only be used on things that increase the supply of water (such as recycling, fixing pipes, more dams, etc). Water Rewards are paid for from the general cost of supplying all water. That is, everyone pays a little more for water than it costs to deliver and if you use more than your allocation you pay much more. This extra money is distributed to people through Water Rewards and they then spend it on ways of increasing water supply.

We asked for a grant from the Water Commission to do a trial for Water Rewards for urban water. http://cscoxk.wordpress.com/2007/01/21/water-rewards/ Using this approach we believe will remove the need for urban water restrictions. The submission has been with the Commission since last June but they have not yet made a decision. We have a Water Authority willing to give it a trial if we get the grant and the odds are probably in our favour.

When I heard that the PM was announcing grants from the Water Commission I thought we would hear one way or the other but as with all things where we get governments involved in deciding how to spend money we get long delays and decisions made on the basis of politics, personalities and internal turf wars etc. so I am not at all confident that our modest proposal will get up or if it does whether it will be this year or next or whether it will shelved and “given” to someone else in a different guise.

Indeed, who knows. But there is of course a tremendous pressure on the Arab and Persian side too – in 100 years they’ll have no oil wealth. The Arabs, in particular, may have even less military clout than now (Iran has the prerequisites for a more broadly based economy).

I think swio has it right – Israeli sabre-rattling is all about pressuring Washington, not Teheran. Of course the Yanks would be utterly stupid to respond to it but then we all know Chimpo has form in the stupidity stakes.

Well… The Kingdom of Jerusalem continued as a legal fiction for centuries, but it continued in an offshore way like Taiwan until the 14th or 15th century (depending just where you draw the line). And the last holdings on the mainland weren’t technically part of the Kingdom, as I recall, but some other Christian rulers fief.

But what counts most is probably the fall of Jerusalem in the late 12th century, that set off the Third Crusade. That wasn’t able to reconquer Jerusalem, but more to the point it wasn’t even able to provide the same secure holding that the First Crusade had obtained.

But it has been argued that even that wasn’t secure (see Belloc), since the Christian powers between them (not just the Kingdom) didn’t go far enough inland to break their strategic encirclement.

Getting back to it, Israel’s isolation probably corresponds to the first century of the Latin Kingdom, or even to the technically advanced position of the Philistines until everyone else got iron. It clearly can’t last indefinitely, and Israel never even tried to use its wasting asset to build more secure regional arrangements. The only way they can make their current approach work is a full blown reconquista, clearing all the Arab lands between Turkey, Suez, and the upper Euphrates. Anything less is long term unstable, like mixed culture Spain.

Simonjm: There are more choices in the world than to be (a) a clone of Tim Flannery or (b) a head in the sand yes man for little jonny. You may have a bitter & twisted political bias, which colours & possibly sours your every day. Not all are hamstrung with this emotional autism.

Tim Flannery is.. er.. not noted near as much for his accuracy as he is for his limelight seeking.

Just trying to work what that bias is SATP I’m a swing voter have been for some time, I from the left of many issues but on the right on others.

Unlike others I’ll call a spade a spade, not defend the indefensible or attack science just because it goes against my own ideology.

Iâ€™m more then willing to have a go at any â€˜greenieâ€™ policy and Iâ€™m quite open to having nuclear on the table, and having nothing fundamentally against capitalism as long as it takes in externalities and incorporates a sustainable social ethical perspective.

So I donâ€™t have to be a clone of Flannery nor try to be influenced by the belief overkill bias regarding Howard. But since Howard and others of his kind within the spectrum of degree of anti environmentalists have such a fine record on the issue it can speak for itself.

Just like you coming out and calling Flannery a twit without putting any substance to the attack and given the overall context of the science on the issue not only of this natural resource but others as well speaks volumes.

But I suppose it say something about standards one can still be a twit and still be Australian of the Year. Go Figure. Maybe you could write a letter to the papers on how making a twit Australian of the Year demeans the award. Shame shame.

I can see the point of Kevin Cox’s WaterFunds suggestion but there is one critical element to ‘currency’ schemes and that’s how they interact with the mainstream economy. In this case it’s the definition of ‘ways to increase the supply of water’. In other words how much of my waterfunds savings can I spend on polypipe for my “indoor plant nursery”? Without a clear definition such schemes are open to rorting.
I think such schemes will work better if confined to a catchment or a quasi-catchment (e.g. coastal river systems). Consider the potential outcry of say, Perth or Launceston citizens over their water savings being spent in Brisbane rather than reducing their own water rates. I’m finding it difficult to see how, nationwide, catchment authorities could trade and manage at the same time given that they would have to initiate much (or all) of the expenditure. What’s to stop them become captive of an ENRON style rort. Also,it’s hard to see how political considerations (catchments=electorates) will not force it to become a two tiered system inevitably. So I’d go with the flow (sorry) and limit trading to catchments and catchment authorities.
Taking it catchment by catchment, also reduces the problem of groundwater assessment. I think that in many cases the problem with groundwater is largely political rather than technical. It’s getting meters installed rather than coming up with expensive new ways to measure consumption that’s the problem. The other problem is ownership, which is where the definition of quasi-catchment might need to be argued over. Consider Yarragadee aquifer which could be argued by Perthites to be part of the West Coastal aquifer system but not by any of the Shires that it lies under!

I don’t think this is an easy problem and au contraire TIm Flannery’s request that the Murray Darling system should be managed by an authority that can operated at arm’s length from politicians seems like a good place to start. But I think that it will be inevitable that trading between catchments will be mediated by political considerations.

Kyan the definition of ways to increase water supply as you say is critical. The investments are measured by the return to the spender and so the natural market forces of getting the best return will take care of most rorting. It is not too difficult to define
what are acceptable projects as we are already doing this in defining ways we can increase water supply from the water recycling schemes of SE Queensland, to the desalination in WA, to subsidises for water tanks in Canberra, to weirs in South Australia. The schemes as designed are voluntary schemes – not compulsory. You do not have to participate if you do not want to and the schemes will be controlled by members who will be able to stop any attempt at rorting.

Remember too that the money being spent is money that individuals control – it is not government money – so individuals are making the decisions and so if they decide that they will get a better return on their Water Rewards from the other side of the continent then they should be allowed to do so. Remember too that money is not spent on water but on ways of increasing the utilisation of available water. We do not have any trouble with Tasmanian money being used to fund WA iron ore mines so why should we worry about investment funds funding water recycling projects in other parts of the country.

I would be most interested in hearing about other “currency” schemes. The only ones I have been able to find are the Australian Compulsory Super scheme and the Singapore Health schemes – both of which seem to be successful.

Groundwater allocations are a problem no matter how you do things and it is not confined to Water Rewards and so is not an argument against Water Rewards per se. Personally I would simply give everyone who is currently living anywhere on the aquifer a water allocation and if someone wanted to use ground water they would have to buy it from someone who in turn would have to spend the money on making better use of existing water.

For those interested there should be an article on Urban Water Rewards in Wednesday’s Canberra Times.

RE, “currency schemes”
Sorry, it was a gut reaction to this sentence :- “Let us call this money WaterFunds.” It sounded like some kind of LETS scheme, but as a kind of Super Scheme it makes more sense. However, I would still contend that rorting could be a problem because while voluntary schemes are self limiting in this regard, it’s a different matter when it’s compulsory. Which I think is inevitable. I know that Super is compulsory but the benefits from super (or a health insurance scheme) are purely personal not tradeable.

The problem is that spending money to make ‘better use of existing water’ is hand waving away the issue of self interest. It’s a laudable aim but nobody is gonna take it seriously.

OTOH it strikes me as a major market failure( or perhaps it’s just a plain rip off) that the govenrment is under the greatest pressure to pay top dollar for water allocations during a drought because of the ecological consequences if they don’t. Sounds more like blackmail than a market to me.

Kyan thanks for the comments. To implement the system we create a new currency that is only to be used for water purposes. Common examples of special currencies are frequent flyer and other rewards programs (and other currencies). An important part of the system is the ability for the new currency to be sold for other currencies. Thus you can put your Water Funds up for sale and get paid in another currency but the Water Funds themselves still retain the property that they have to be used on Water things.

By rorting I presume you mean people using the system in ways that it was not intended. In other words not using the Funds for Water supply enhancement. This is an issue but the reasons why it is unlikely to be a major problem are:

1. If someone cannot use their Water Funds they can sell them to someone who can. We expect most people to take this option.
2. The schemes on which they can be used have to be registered and approved.
3. Funds flowing into projects will be visible and public. (Who puts funds into what project is not made public but is available to investigators).
4. Fraudulent use of funds is illegal and the transactions related to them can be easily reversed.

For example one way of rorting the system is to pretend to purchase say water tanks but to have an arrangement with a supplier who splits the “profit” but does not deliver any water tank. These sorts of arrangements are obviously fraudulent but they are easy to detect and they leave a “paper trail” and they normally require two parties to conspire.

There is less chance of rorting than there is in schemes where projects are approved and then money given. Examples are dollar for dollar matching projects. One of the major reasons money has been slow in being spent by the Water Commission is the difficult of ensuring that the projects being put up mainly by the States are genuine projects that will cost what they say they cost.

Schemes of simply buying back water allocations for cash is money that is unlikely to go to increasing the amount of usable water.

The Water Funds market will be difficult to manipulate as was the case of electricity and Enron because the Funds are restricted in use and there will be little volatility in price because of these restrictions and because of the price ceiling of the face value of Water Funds.